“Because asset prices reflect the swings in sentiment between optimism and pessimism, and in extreme cases between fear and greed, it is possible to improve the chance of strong future returns tremendously by buying when a stock is out of favour and the price is depressed. Similarly, as an asset becomes more popular and its price rises, future expected returns will diminish,” le Roux says.

An asset manager’s ability to be flexible depends to a certain extent on the amount of cash at their disposal. Cash can provide firepower when you need it,” he says.

PSG Asset Management has a track record of waiting patiently for good opportunities for its clients. They will not invest in overpriced or high-risk, low-return stocks – even if they are popular or large components of benchmarks.

“In times where higher-quality businesses are popular and prices are high, you can expect us to be sitting with large levels of cash in the funds that allow for this. This is the case at the moment. We think the value of cash is tremendously underappreciated.”

Cash may not yield much above inflation much of the time, but having it on hand allows you to deploy it just when you need it, in the inevitable moments of panic. “We think that the value of cash is underappreciated and regard cash as the ammunition in a portfolio that allows you to invest in inherently risky assets such as equities,” le Roux says.

PSG Asset Management follows a disciplined investment process that sees it buying when others are panicking and selling when prices are rising. “Cash levels in our funds will therefore be rising when stocks are getting more expensive and future returns are diminishing. We will employ that cash aggressively when panic sets in, even if it feels uncomfortable at the time.”

At the end of the day, uncertainty and risk actually provide investment opportunities.

Investors are made aware of the uncertain macroeconomic environment and elevated levels of political risk in South Africa daily. However, it is this uncertainty and risk that provides the opportunity to invest in securities at levels that provide attractive long-term returns.

“It is possible that local economic or political conditions deteriorate further. In addition, Brexit has increased the range of outcomes for financial markets. This is why we consider it appropriate to keep relatively high levels of cash on hand to seize future opportunities.”

Le Roux says the size of PSG’s cash holding reflects its assessment of the state of the market.

For example, at the start of 2008 its multi asset portfolios held a lot of cash – the PSG Flexible Fund had more than 30% of its fund value in cash. This reflected their assessment at the time that valuations and risk were elevated for much of the stock market, which meant they could find fewer investable opportunities. The global financial crisis provided an opportunity to employ cash aggressively as good companies went on sale. By the end of 2008, the PSG Flexible Fund was 95% invested in equities. The actions taken during those difficult times are indicative of how we manage money.